The final outcome of the class action lawsuits and the subsequent Realtor® settlements are still evolving. The settlements have yet to be approved by the judges overseeing all the cases, and the Justice Department and some consumer advocates have indicated that they think the terms of the settlement pertaining to industry practices don’t go far enough. Some of us in the industry have been engaged in a tense debate over who will ultimately benefit from these changes in industry practices, and more importantly, who will be hurt by them. I don’t think it takes great foresight to recognize that if buyers, especially those with modest wealth, are burdened with the added cost of having to pay their own agent fees, many could not afford to do so. The additional burden would either cause them to forgo purchasing a home altogether or prompt them to move forward without agent representation, leaving them vulnerable to a host of risks.
While the terms of the settlements do not explicitly prohibit broker cooperation, the Justice Department and some consumer advocates have expressed in fairly explicit terms that they would like to see it abolished altogether. This is a grave concern to many of us who advocate for minority homeownership. It is disconcerting that a financial ladder that has been there for buyers for almost one hundred years, is threatened to be eliminated exactly when the majority of net new homeowners are expected to come from Hispanic and other minority communities.
The plaintiffs and some industry experts believe that the terms of the settlement will benefit everyone except for those “greedy realtors”. I believe that is unlikely, and even the staunchest proponents of the class action lawsuits have acknowledged that there are reasonable concerns about the impact it could have to lower income homebuyers who are on the margin in terms of financial resources, and experience with the homebuying process.
At the center of the debate is how agents who represent buyers should receive their compensation. Prior to the settlement, this was rarely an issue. Typically, a buyer could choose the agent of their choice and not have to worry about how their agent will be compensated, because their agent received their compensation by participating in the commission paid to the seller’s agent. Anyone who has ever purchased a home probably can acknowledge how much of a relief this was, especially if it was a struggle to come up with a down payment and closing costs. Most people are also aware that when they sell a home, it is their turn to pay the agent commissions.
The system wasn’t perfect, but worked pretty well. However, the plaintiffs in the lawsuits successfully argued that this practice of shared compensation between agents, which is known as broker cooperation, allowed the real estate agents to collude with one another to keep their commissions excessively high. The plaintiffs and their supporters have also argued that if the commissions were “decoupled” meaning the buyer would pay for their agent fees independent of the seller proceeds, commissions would go down, home prices would become more affordable, and consumers on both ends of the deal would somehow benefit. This is wishful thinking. As the Urban Institute’s Alexei Alexandrov and Laurie Goodman made clear in a January 2024 paper, “home prices and rents are primarily determined by the supply and demand for housing units and by changes to that supply and demand,” which they admitted was a “seemingly obvious point.”
As the National Housing Conference’s Paycheck to Paycheck database demonstrates, the salary needed to afford the same median priced home has nearly doubled since 2019, accounting for interest rates and home prices. No one has shown that commissions have had any impact on the role of supply and demand in home prices.
According to another paper by the Urban Institute, first-time homebuyers who were required to pay their real estate agent’s commission “would need to find an additional $6,000, based on the median-price existing home sale, with a reduced fee of 1.5 percent of the house price. Many buyers won’t be able to come up with the cash, which would limit the buyer pool, squeezing out first-time homebuyers in particular.”
One of the undertones behind all of this is the belief that buyer’s agents don’t do much work and are probably expendable. This could not be further from the truth. Buyer’s agents do most of the heavy lifting in a transaction, and are essential to the home buying process. These agents provide resources and services to homebuyers far beyond assisting in the home selection process, including credit education and counseling, explanation of a buyer’s rights and responsibilities, and understanding of options for asset protection and estate planning.
Others believe that buyers will be able to finance their agent fees. This is currently not permissible for most loan programs. The Veterans Administration (VA) has said that it is not likely to change its policies for VA loans, and even if other agencies amend their policies to allow for the financing of agent fees, it would undoubtedly trigger additional expenses and risk factors that make it far from an ideal solution.
The elimination of broker cooperation would give institutional buyers with deep pockets an even greater advantage over first-time buyers, and it would create fertile ground for a host of mischief in the industry including pocket listings and fair housing violations.
The National Association of Hispanic Real Estate Professionals (NAHREP) supports innovation in the industry, and solutions that improve affordability, reduce unnecessary barriers and enhance the buyer experience. However, NAHREP urges industry stakeholders, policymakers, and community members to address these issues by first adopting a Do No Harm principle by agreeing that any major disruption to the housing industry should begin with a commitment to avoid harm to the homebuyer population that can least afford additional burdens placed on them. NAHREP advocates for the protection of Broker Cooperation in an effort to continue the work towards a more equitable housing ecosystem, and calls on government, advocates and the entire housing industry to join us in this pledge.